Dems prevail on plan to eliminate federal deductibility, lower income tax rates

DES MOINES - A House tax-writing panel split along party lines Monday night on a Democratic proposal that would create new winners and losers under the Iowa income tax code.

Majority Democrats championed the plan,  House Study Bill 284, as a way to give many Iowans a tax break while maintaining overall

income tax collections, simplify the tax code and make the state more attractive to out-of-state investors.

The bill, approved by the House Ways and Means Committee, would end federal deductibility, a provision in the Iowa tax code that allows taxpayers to deduct the amount they pay in federal income taxes. Democrats would use the $595 million windfall from ending federal deductibility to drive down tax rates by as much as 2 percentage point at the upper end, and expand so-called family friendly tax credits.

"We think that's meaningful tax relief," Chairman Paul Shomshor, D-Council Bluffs, said. The plan would raise taxes on Iowans filing with an adjusted gross income of $125,000 or more, but offer either lower taxes or no change for the other two-thirds of Iowans, he said.

Republicans scoffed at the idea the Democratic plan offers true tax relief. Using Democrats' numbers, House Minority Leader Kraig Paulsen, R-Hiawatha, said the change would give the average Iowan an extra 17 cents a day or $62.05 a year.

"Seventeen cents a day will do nothing for middle-class Iowans or small businesses who are feeling the pain of this recession," he said. While Republicans are ready to join Democrats in passing meaningful tax relief, he said they aren't interested in eliminating the largest tax deduction that Iowans' receive.

Based on Department of Revenue numbers, 667,314 of the state's 1,360,027 income tax filers would pay less, 242,421 would see no change and 450,292 would pay more.

In reality, Paulsen argued, what Democrats are masquerading as a middle-class tax cut will be an increase for most Iowans when the Bush tax cuts expire and federal taxes go up in 2011. If Iowans are unable to deduct those higher federal taxes, they will pay an additional $125 million in taxes, Paulsen said.

Many Iowans will feel the impact before that, committee members argued. Looking at the Revenue numbers, Republican members said 69 percent of Iowans making $70,000 or less would not get relief. Also, they said, 180,000 Iowans earning less than $40,000 would see a tax increase.

The committee split 14-11 along party lines to reject a Republican amendment to leave federal deductibility alone while adopting the lower tax rates Democrats proposed. That would be a $600 million tax cut, something the state can't afford, Shomshor said.

With Democrats expecting to prevail on the bill, the House recessed shortly after 3 p.m. Monday, waiting to adjourn until after the Ways and Means Committee completed its work and the bill was read in after 9 p.m. so it will be eligible for debate later this week.